Eurozone and Swiss inflationary pressures are easing

The moderation of inflation in the eurozone and Switzerland continued in September despite the rise in fuel prices. The fall in core inflation in both economies was larger than markets expected and makes it unlikely that the European Central Bank and Swiss National Bank will raise interest rates further.

Eurozone inflation fell to 4.3% year-on-year (YoY), the lowest since late 2021 (see Chart 1). The drop from 5.2% YoY in August is mainly due to prices of household energy bills and food, and of German public transport. Core inflation fell to 4.5% YoY, the smallest increase in almost a year, reflecting a moderation in prices of non-energy industrial goods and services.

Chart 1. Eurozone harmonised index of consumer prices (HICP) and producer price index (PPI) inflation (YoY)

Source: LSEG Data & Analytics and EFGAM calculations. Data as at 4 October 2023.

Besides public transport in Germany, prices have slowed for apparel and in tourism related sectors. Overall, service prices slowed to 4.7% YoY, down from the July peak, and the increase in prices of industrial goods excluding energy and food fell to 4.2%.

The moderation in core prices is evident when considering the most recent months (see Chart 2). In seasonally adjusted terms, the annualised quarterly growth in prices of goods excluding food and energy is now lower than the ECB’s 2% objective. The increase in service prices remains above 2% but has moved much closer to it.

Chart 2. Eurozone HICP core components

Source: LSEG Data & Analytics and EFGAM calculations. Data as at 4 October 2023.

Several factors point to a further decline in eurozone inflation, including a favourable base effect until early 2024. Company surveys indicate a more cautious price setting compared to the recent past. The drop in the price of electricity and natural gas has not yet been fully transmitted to households and corporates and this will facilitate the moderation of prices in all production sectors. The 11.5% YoY drop in producer prices in August is a case in point and suggests there is more disinflation in the pipeline (see Chart 1).

In Switzerland, headline inflation rose marginally to 1.7% YoY in September, but remains within the SNB's 0-2% target range. Core inflation calculated by the Statistics Office fell to 1.3% YoY, returning to early 2022 levels and if core inflation is calculated net of energy and food prices, as is the case in the eurozone and the US, it is only 1.1% YoY.

The underlying dynamics of the Swiss CPI point to a further decline in inflation. In the last three months the seasonally adjusted prices of core goods and services increased by 0.8% and 0.6% annualised, respectively (see Chart 3). The announced increases in natural gas and electricity bills that will take effect between the end of 2023 and January 2024 are lower than a year ago and, other factors being equal, will dampen inflation.

Chart 3. Swiss CPI core components

Source: LSEG Data & Analytics and EFGAM calculations. Data as at 4 October 2023.

In conclusion, in September inflation in the eurozone and Switzerland was lower than markets expected, and various elements indicate that it will decline further. In the eurozone, inflation will move closer to the ECB’s 2% target in 2024, earlier than the ECB's latest macroeconomic projections indicate. In the case of Switzerland, inflation is expected to fall towards the midpoint of the SNB's 0-2% target range.

The implication for the ECB and SNB is that, in the absence of new shocks, policy rates have peaked and that the conditions for their reduction could be in place in 2024, perhaps earlier than discounted in the futures contracts on interbank interest rate (see Chart 4).

Chart 4. 3-month rates implied in futures contracts

Source: LSEG Data & Analytics and EFGAM calculations. Data as at 4 October 2023.